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Shell enters shale oil and gas project in Argentina

Buenos Aires (Platts)–15Dec2011/400 pm EST/2100 GMT

Shell has agreed to partner with Argentina’s Medanito on a shale oil and natural gas project in southwestern Argentina, with plans to invest at least $200 million over the next five years, a person involved in the deal said Thursday.

“The investment could wind up being more, depending on the evolution of each exploration well,” Medanito’s director of corporate affairs, Andres Carosio, said in an interview.

The exploration and production activities will be carried out in the Aguila Mora and Sierras Blancas blocks in the Neuquen Basin for both conventional and unconventional oil and gas, he said.

Shell, which operates a crude refinery and service stations in Argentina, will act as operator and hold a 65% interest in the project. This is one of its first upstream projects ever in Argentina.

Buenos Aires-based Medanito will hold a 25% stake and Gas y Petroleo de Neuquen, the state oil company of Neuquen, will hold the remaining 10%, Carosio said.

The Neuquen Basin is attracting growing foreign investment on the back of estimates of big potential and a string of discoveries over the past year.

The UD Energy Information Administration in April said Argentina has 774 Tcf of shale gas resources, far more than its conventional proved gas reserves of 13.4 Tcf.

Most of the potential is in the Neuquen Basin. The country’s biggest energy company, YPF, which is backed by Spain’s Repsol, last month said it found 927 million barrels of shale oil resources there. That followed its earlier finds of 150 million b of shale oil resources and 4.5 Tcf of shale gas resources in the same area. YPF already is producing 5,000 barrels of shale oil per day from 15 vertical wells in the basin.

France’s Total and US companies Apache, Chevron and ExxonMobil as well as Argentine and Canadian companies are starting to drill. Indeed, Medanito and Texas-based EOG Resources in the next week plan to start exploratory drilling for shale oil and gas in the Aguada del Chivato and Aguada Bocarey blocks in Neuquen, with spending of 108 million pesos ($25.2 million), Carosio said.

EOG and Medanito will spend a similar amount as with the Shell venture over the next five years, with EOG holding a 65% stake and Medanito 45%.

The effort will encompass unconventional hydrocarbons, as Medanito already is producing conventional streams at the blocks, its biggest, Aguada del Chivato and Aguada Bocarey, are producing about 1,500 b/d of crude and 400 cu m/d of gas, according to industry data.

STRONG POTENTIAL

“We see a lot of potential in unconventional oil and gas, in particular shale,” Carosio said.

He cited Los Molles and Vaca Muerta as the formations with the strongest potential in the Neuquen Basin, adding that development of shale resources will prove beneficial for the future of energy supplies in Argentina.

The country has struggled to meet rising demand amid dwindling production and reserves of conventional oil and gas, forcing the government to step up imports of gas, diesel and fuel oil, and slimming its trade surplus.

The investment climate appears to be improving. The government, which has kept a tight lid on energy prices since 2002 to limit inflation, appears disposed to boost the prices.

Energy executives say the gas price should be $6-8/MMBtu for shale development, more than double the current average of $3/MMBtu.

Planning Minister Julio De Vido, the government’s top energy strategist, this week said crude and gas prices will rise to take into account the higher drilling and technology costs for unconventional resources as long as the hikes don’t slow industrial activity.

Carosio said domestic crude prices are at a level “to sustain any development,” while those for gas are expected “to rise gradually” so that when shale gas projects are ready to come into production the prices will be adequate.

TECHNOLOGY

Medanito’s partnerships with EOG and Shell also are strategic for technology, he added.

Its partners will bring in equipment that otherwise would have been hard for smaller players like Medanito to secure, he said.

–Charles Newbery, [email protected]

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